I recently came across a quote in a book:

"All single factor models share the limitation that shifts in curve levels cause shifts in the package of vanilla options that are a good hedge for the Bermudan option".

As far as I can see, all models would require hedge rebalancing for the Bermudan when rates change.

I fail to see why in particular, a one factor model would imply a higher amount of rebalancing, which is what I think this statement implies. Can anyone interpret this statement better for me, or reason why in particular a one factor model is less robust?



Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.